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MC Question 1

You are an audit manager of Buffon & Co, and you have just been assigned the audit of Maldini Co (Maldini). The audit engagement partner who is responsible for the audit of Maldini, a listed company, has been in place for approximately eight years and her son has just been offered a role with Maldini as a sales manager. This role would entitle him to shares in Maldini as part of his remuneration package.

Maldiniā€™s board of directors is considering establishing an internal audit function, and the finance director has asked Buffon & Co about the differences in the role of internal audit and external audit. If the internal audit function is established, the directors have suggested that they may wish to outsource this to Buffon & Co.

The finance director has suggested to the board that if Buffon & Co is appointed as internal as well as external auditors, then fees should be renegotiated with at least 20% of all internal and external audit fees being based on the profit after tax of the company as this will align the interests of Buffon & Co and Maldini.

From a review of the information above, your audit assistant has highlighted some of the potential risks to independence in respect of the audit of Maldini.

(1) Audit partner has been in the position for eight years

(2) Maldini has asked for advice regarding role of internal audit

(3) Maldini has asked Buffon & Co to carry out internal audit work

(4) Fees will be based on 20% of profit after tax

Which of the following options correctly identifies the valid threats to independence and allocates the threat to the appropriate category?

Self-interest Self-review Familiarity
A. 1 only 2 and 3 4 only
B. 1 only 2 only 4 only
C. 2 only 3 and 4 1 only
D. 4 only 3 only 1 only
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